Gap Grows Between Credit-Card Users

It's a clich known the world over. Americans save less and buy more than just about anyone, usually with credit cards.

But as credit experts take a hard look at the nation's mounting consumer debt, a new picture is emerging. A growing number of Americans actually save money by charging purchases, paying off their balances every month, and earning credit-card premiums. Their savings are being subsidized by a larger, less fortunate group that continues to pay stubbornly high credit-card interest. The result is a growing gap between the credit-rich and the credit-poor.

"In the post-industrial economy, there's a new kind of inequality," says Robert Manning, a sociology professor at American University in Washington. "Poor people have to pay 20 percent [in credit-card interest] to subsidize affluent people who pay no interest at all."

It is not clear, however, that the credit-poor have low incomes. Credit experts report that they're seeing even high-income people struggle with large credit-card debts. "It's so dang easy to spend money and there are so many products to buy, so many services to buy," says Craig Israelsen, professor of consumer and family economics at the University of Missouri in Columbia. "The market is just sucking money out of people."

The rising debts of the credit-poor are not large enough to threaten the economy, economists say. But they could slow consumer spending as some Americans spend an increasing share of their income paying credit-card interest. Those debts leave them more vulnerable to financial reverses and economic downturns.

"There are more people getting closer to their limit," says Lawrence Shimering, managing director of the Economic Strategy Institute, a nonprofit research firm in Washington. "If we had a serious recession, yeah, there would be more serious problems."

A growing number of Americans are credit-rich. Madeleine Smith, profiled in a book-in-progress by Professor Manning, uses a single Visa card that charges no annual fee. Because she pays off her balance each month, she pays no interest either.

Her method is an increasingly popular way to buy everything from a new television to the weekly groceries. Consumers who can afford to pay off their balances each month can save money two ways. First they get a few extra weeks' use of their cash tucked away, say, in an interest-bearing checking account. Second, many cards offer premiums such as cash rebates, free gasoline, or airline "miles."

Last year, slightly more than a fifth of the nation's $454 billion credit-card tab was paid off within 30 days, according to The Nilson Report, an Oxnard, Calif., newsletter on consumer payments. By 2005, The Nilson Report estimates, the nation's credit-card spending will nearly triple to $1.2 trillion; almost a quarter of it will be paid off within 30 days.

Banks are happy to provide cards to the credit-rich to attract them to other services. But they don't make much, if any, money on people who use no-fee cards and incur no interest charges. So they have targeted a wider and more diverse base of consumers, from college students to the working class. Even entrepreneurs, who can't get a traditional small-business loan, are getting credit-card offers as a way to finance growth.

It's a careful balancing act for the banks. As delinquencies have risen, some banks are again tightening up standards for taking on new credit-card accounts. What they're looking for are customers who will carry a balance. The interest charges they pay represent a bonanza for the banks. Credit cards are three times more profitable than other banking activities, estimates Lawrence Ausubel, an economics professor at the University of Maryland in College Park.

Still, banks are showering consumers with credit-card solicitations. (In 1994, they sent 2.3 billion direct-mail pitches, enough to reach every American adult and child 10 times.) And consumers are taking them up on the offers. At the end of 1994, the typical American had two to three major bank cards. A year later, it was three to four, according to Bankcard Holders of America, a consumer-credit group in Salem, Va.

This marks a dramatic change from the United States a quarter-century ago, when consumers were far more cautious about taking on debt. In 1970, the average consumer had a card or two and a balance of less than $1,000. By 1990, even adjusted for inflation, the average card balance had climbed 47 percent, while median family income had grown only 6 percent, calculates University of Missouri Professor Israelsen.

"The whole thinking process, the whole value system of saving, of waiting to buy things, has been flipped around," says Tahira Hira, professor of family finance and consumer economics at Iowa State University in Ames. Back then, even the credit consumers used demanded more responsibility.

When people went to buy a car or washing machine, they typically took out installment loans, which forced them to set aside fixed amounts at regular intervals. Credit cards have eroded that discipline, Professor Hira says.Card issuers often allow consumers to pay back only 1 percent or 2 percent of their outstanding balances. This makes it far easier for card-holders to carry a balance but far more expensive to pay it off.

"We've created a system where we can string them along for a very long time," Hira says. But "a larger population of our country is more vulnerable." Any dips in the economy could cause them to derail.